This paper sets out to investigate relative wages and wage dispersion for formal sector workers in the private and public sectors. The paper explicitly measures the size of the public sector wage premium and offers some reasons for its existence. It also attempts to document the changing pattern of wage differentials between public and private sector employees between 1995 and 2000. Three sources of differences in the public and private sector wage distributions are considered. These are: differences in the distributions of worker characteristics in the two sectors; differences in the returns to various worker characteristics in the two sectors; and differences in the distributions of unexplained wage residuals across sectors (Juhn, Murphy and Pierce, 1993).